Reasons behind Shifting Exchange Rates

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The FOREX market is extremely volatile. You would continuously experience the rise or fall of the currency value at every hour. The changing value of money often canput you in a situation where you might have to pay more or less while changing your currency into a foreign one. But the question is why these exchange rates fluctuate.It is often stated that the shifting of the demand and supply results in such fluctuation. The economic health of a country depends on many factors and exchange rate is one of the important determinants.Here are the reasons behind the shift that forces exchange rate to move.

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  • The changing interest rates always have an impact on the currency value. For instance, if the rate of interest is increased, foreign capital would flow in, which would raise the value of the currency in relation to other currencies. Similarly, lower interest rates would have just the opposite impact and the buyers would opt for currencies with higher interest rates. This results in the decreasing currency demand because no one would like to earn low interest on their deposits, which finally leads to declining exchange rates.

 

  • Inflation is yet another reason behind the floating exchange rates. If a country exhibits a tendency of lower inflation rate, the value of the currency increases, which automatically enhance the purchasing power. On the other hand, higher inflation rate acts in a negative manner because the decreasing currency value affects various sectors like high interest rate or declining trade leading to a fall in the exchange rate.

 

  • It is necessary to maintain a balance between the import and export of a country because a deficit in the balance of payments leads to change in the rate of exchange. In order to hold on to a good currency value, a country needs to earn more through their exports and import less from foreign lands. Whereas too much of import is detrimental for a country’s economy as it lowers the demand for the country’s currency, showing instability in the current account because more foreign capital is borrowed in the terms of trade.

 

  • Apart from the hard core economical factors, political changes and international events equally plays an important role in the fluctuating exchange rates. If a business man wants to invest money, he would always like to seek stable countries with strong economic performance. Countries afflicted with political turmoil and risks would always be avoided and the chance of foreign investment is negligible. Hence, the currency value depreciates which further adds fluctuation in the exchange rates.

Undoubtedly,these factors affect the money value greatly and it is not only a matter of anxiety for the investors because the commoners equally face the impact of the currency movement. For instance, when you are travelling abroad, you usuallybuy some foreign currency to make paymentsat your destination. The rate of exchange at which you have bought the money may not be same when you come back to your own homeland. Hence, at the time of returning the unused money, you may get a low rate of return, which is definitely a loss on your part. In order to avoid such circumstances, you can buy travel money card from a FOREX service provider. The best thing about this card is the fixed exchange rate, that is to say,at the time of retuning the unused currency the FOREX service provider would follow the original exchange rate. Therefore, you do not incur any loss, but there are chances of profit. However, if you are planning to transfer money or make any international payments, the fluctuating exchange rate is bound to affect you anyway.

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